Identifying and Resolving Fraud and Corruption Cases in the US and the UK: PART IV (Deferred and Non-Prosecution Agreements)
In order to entice corporates to voluntarily disclose instances of fraud and corruption, meaningfully cooperate with government investigations, and/or undertake remedial measures, the US Department of Justice and Securities and Exchange Commission will, in appropriate circumstances, enter into Deferred Prosecution Agreements (DPAs) and Non-Prosecution Agreements (NPAs) with corporations. The US Attorneys Manual describes the agreements as follows: ‘[A] deferred prosecution agreement is typically predicated upon the filing of a formal charging document by the government, and the agreement is filed with the appropriate court. In the non-prosecution agreement context, formal charges are not filed and the agreement is maintained by the parties rather than being filed with a court’. While DPAs and NPAs are not, by any means, agreed in most DOJ and SEC investigations, they turn up more frequently than one might guess.
The DOJ has a long-established, though increasingly common, practice of negotiating and entering into DPAs and NPAs with corporates in appropriate circumstances. DPAs are particularly popular with the DOJ for resolving corporate fraud matters, and are most frequently employed in connection with FCPA violations. According to a United States Government Accountability Office Report, summarized here, the DOJ entered into four deferred and non-prosecution agreements in fiscal year 2003 and 38 agreements in 2008. The DOJ entered into 35 agreements in fiscal year 2010, and based on its activity in the first half of 2011, the Justice Department appears to be on pace to meet or exceed that number in 2011. The SEC, too, is beginning to make use of DPAs and NPAs, having entered into its first deferred and non-prosecution agreement within the last year.
Through these agreements, federal regulators agree to forgo criminal prosecution and/or civil enforcement actions. In exchange for the agreement, a corporate may be required to admit to some wrongdoing, pay fines or restitution, take remedial measures, commit to a future course of conduct, and/or submit to a corporate monitorship. Both the SEC and DOJ view DPAs and NPAs as a means of encouraging companies and individuals to cooperate with ongoing investigations and enforcement actions. One key principal underpinning the use of DPAs and NPAs is that prosecutors and enforcement staff can sanction corporates without resorting to a formal criminal prosecution or civil enforcement action and, thus, without subjecting the corporate to any unintended consequences that might come with formal enforcement proceedings.
Taking an overly simplistic view of the matter, it may useful to think of DPAs, NPAs, and plea agreements (which we address in Part V of this series) not as extraordinary dispute resolution tools, but as something akin to a Tomlin order (or another form of consent decree, which is not uncommon in the English civil justice system). In the US, at least, these agreements are viewed by the courts and practitioners as simple agreements memorialized in a written document. The terms can be modified by the courts or the rejected by the courts and, indeed, enforced in the courts – as with any consent order.
At present, however, deferred prosecution agreements simply do not exist in the UK. The SFO, however, seem to like the idea of deferred prosecution agreements. In a speech delivered at the London School of Economics on 30 March 2011, Richard Alderman, Director of the SFO, discussed the US Department of Justice’s use of deferred prosecution agreements, and explained how they might work for the SFO.
In the wake of the Arthur Andersen and Enron scandals, Mr Alderman said, the DOJ devised the concept of deferred prosecution agreements, through which corporates ‘enter into a settlement with the Department of Justice under which the firm or corporation agreed to plead guilty to various charges, but the DOJ deferred the prosecution for a number of years to allow the corporation to pay substantial fines together with other remediation including monitoring’. If the corporate meets the requirements of the agreement, the prosecution ends without conviction.
Mr Alderman admits he ‘find[s] the model of deferred prosecutions attractive’. While he recognises that some debate exists in the UK as to the efficacy of DPAs, Alderman believes ‘deferred prosecutions are … the best answer to a complicated and very real problem’. Alderman does not advocate, however, a system in which prosecutors and corporates enter into ‘private agreements’ with wrongdoers. Judicial oversight is paramount, he says, for ‘[o]nly a judge can decide whether the terms are appropriate’. Nevertheless, Alderman insists there is ‘considerable scope’ for the use of DPAs in SFO matters.
Indeed, according to Philip Urofsky and Josanne Rickard of Shearman & Sterling LLP in a recent Reuters blog, ‘the SFO and companies should continue the experiment of negotiating pre-charge alternative dispositions – known in the U.S. as ‘deferred prosecution agreements’ – which will be a less expensive option for the budget-constrained SFO and a more predictable process for companies.’ This, they say, will demonstrate that the UK Bribery Act is ‘effective and enforceable’ by ensuring that ‘prosecutions are resolved quickly and with clear and certain consequences’.
Interestingly, Mr. Urofsky and Ms. Rickard note that the SFO have already engaged in ‘pre-charge alternative dispositions’, citing the 2008 case of Balfour Beatty. In that case, Balfour Beatty agreed to admit ‘payment irregularities’ related to a construction project in Alexandria, Egypt, and to pay a £2.25m penalty, in exchange for the SFO’s agreement not to bring charges. This, Urofsky and Rickard submit, ‘was essentially a deferred prosecution’.
Whether the SFO will adopt the DPA (and NPA) as a tool for resolving fraud and corruption practices remains to be seen. It might, however, present a useful alternative to the problems UK regulators face in attempting to fashion binding plea agreements. We will discuss those issues in greater detail in our next post on Identifying and Resolving Fraud and Corruption Cases in the US and the UK.
The McGuireWoods Guest Bloggers are Robert Plotkin, a partner based in McGuireWoods LLP's Washington and New York offices and head of the firm's SEC Enforcement Defense group, and Kurt E. Wolfe, an associate based in McGuireWoods LLP's Washington office and a member of the firm's Government, Regulatory and Criminal Investigations department.